How margin insurance works

Published:February 11, 2014 2:12PM

Last changed:February 11, 2014 2:54PM

Just how a margin protection program for dairy producers under the new farm bill will operate will be determined by USDA. But details on the provisions passed by Congress include coverage levels and premiums that producers can use to decide if the program is right for their operation.

A long anticipated overhaul of federal dairy policy is finally a reality with the 2014 Farm Bill. It eliminates outdated price supports and replaces them with an insurance program to protect producers’ margins between milk prices and feed costs. It also includes a program that would require USDA to purchase products when producer margins fall below a trigger point.

Margin protection has been a hot issue in the dairy industry and widely favored by most sectors. Exactly how it will operate is yet to be determined by USDA, but Congress passed the following provisions:

• The new program has an annual registration fee of $100 and for those who sign up, participation is for the life of the farm bill. Participants can change both the margin level and the amount of production they want to protect each year.

• Participants can choose a level of margin insurance ranging from $4 to $8 per hundredweight of milk, in 50-cent increments. They can also choose the amount of their production to be insured, from 25 to 90 percent, in 5 percent increments.

• Coverage is limited to a farmer’s production history, the highest level of production in 2011, 2012 or 2013. Annual adjustments will be made based on the national average growth in national milk production estimated by USDA. Any growth beyond the national average increase will not be protected.

• There is no premium for the minimum margin protection of $4 per hundredweight of milk. Premiums increase with the level of protection and for production over 4 million pounds a year. Premiums are fixed for the life of the farm bill.

• Margins are calculated by using a national all-milk price and a national average feed cost, both calculated by USDA.

• Indemnity payments will be made when margins fall below the selected coverage level, during any of the consecutive two-month periods of January-February, March-April, May-June, July-August, September-October and November-December. Producers will be paid based on one-sixth of their annual production for any two-month period of lower margins.